What is Arbitration?

In arbitration, parties submit their dispute to an arbitrator or a panel of three arbitrators instead of a state court. Arbitrators are often experts in the relevant industry or area of law. In the construction sector, arbitration through specialised construction arbitration boards is the standard for disputes over standard-form contracts. In international trade, the ICC (International Chamber of Commerce) is a widely used arbitration institution.

Arbitration begins with filing a request with the chosen arbitration institution. The parties then jointly appoint an arbitrator, or each appoint one who together select a third (chair). After written submissions and an oral hearing, the arbitral award is issued. The average duration is 6 to 12 months, shorter than the average 18 months in court for complex commercial cases.

The arbitral award is binding and can be enforced through the courts. Appeal is generally not possible unless the parties agreed to it in advance. This makes arbitration more definitive than court proceedings.

The costs of arbitration are higher than mediation but can be lower than court for complex disputes. Arbitration over a EUR 150,000 dispute costs approximately EUR 8,000 to EUR 15,000 in administration fees and arbitrator fees, excluding legal representation costs.

Contract disputes quickly escalate in time and cost. World Commerce and Contracting calculates that organisations lose an average of 9.2 percent of their annual revenue to poor contract management. Disputes that escalate unnecessarily are part of that figure.

For SMBs in the construction sector, arbitration is often mandatory under standard-form contracts that refer to specialised arbitration boards. In other sectors, arbitration is a deliberate choice when industry expertise of the decision-maker matters or when confidentiality is a concern, as arbitration proceedings are not public.